Turbulent markets claim three more IPOs

Maoye, Solargiga and Samko postpone their listings due to tough market conditions, declining relative valuations and fears of a difficult aftermarket.
The volatile market conditions have forced another three Asian listing candidates to withdraw their initial public offerings shortly before pricing, while a fourth is pondering its options. The deals have been postponed despite a turnaround in regional equity markets towards the end of last week.

Sources say the damage had already been done when the share prices of their respective peers dropped during the IPO marketing periods, eroding the relative valuations of the newcomers. And rather than instil confidence among investors that the markets may have reached the bottom, the recovery seems to have been taken as confirmation that the choppy markets and large day-to-day price swings are here to stay.

ôInvestors are unwilling to buy even at the lowest valuations as the market could easily drop another 1,000-2,000 points the next day,ö one banker says, echoing the uncertainty felt by many.

ôThe markets look better on the headline numbers, but for a lot of people who are running differently positioned books these markets are actually still losing them a lot of money,ö observes another banker.

In Hong Kong, department store operator Maoye International and solar power play Solargiga Energy both pulled their offerings, while a third listing hopeful, construction company SFK Construction, was according to a source, still hesitating last night whether to go ahead with its listing. SFK was due to price its IPO on Thursday last week, while Maoye and Solargiga were both scheduled to price on Friday.

Meanwhile, timber products maker Samko Timber, which is owned by IndonesiaÆs Sampoerna family, withdrew its Singapore IPO after failing to attract enough orders within the indicated price range, according to a source.

The latest three casualties, which had been aiming to raise at least $1.3 billion from their listings, means that five of the six IPOs that were due to price in Asia this week failed to do so with the sixth still in limbo. Real estate developer Changsheng China Property and budget airline operators Cebu Air both withdrew their IPOs in Hong Kong and the Philippines last Tuesday on the eve of the surprise rate cut by the US Federal Reserve that set off the turnaround in Asian markets.

This also means that Hong Kong has yet to see a successful IPO this year. In addition to the deals just mentioned, two more offerings were delayed before they kicked off the formal institutional roadshow - Honghua, a Chinese manufacturer of oil drilling equipment, and SJM Holdings, the casino operating entity controlled by Macau gaming tycoon Stanley Ho. Both of these were delayed for reasons other than market conditions, however.

While January is typically not the busiest month for new listings in Hong Kong, it is rare not to see any successful IPOs during the entire month. In fact, this hasnÆt happened since 1999. Xinjiang Tianye Water Saving Irrigation System Company did list on the main board on Thursday last week, but this was by introduction and didnÆt include any sale of shares to the public. The manufacturer of irrigation systems and equipment was previously listed on the Growth Enterprise Market.

As evidenced by the large number of cancelled deals there hasnÆt been a lack of marketing activity, but given how weak and volatile the secondary market has been, investors may be forgiven for not wanting to commit money to new and untested names. As of Tuesday last week, the Hang Seng Index had fallen on 11 of the 15 trading days in 2008, including a 13.7% plunge on last Monday and Tuesday combined. This left the index down more than 6,000 points, or 21.8%, since the beginning of the year.

The rebound after the Fed trimmed rates by 75bp in the early hours of Wednesday morning saw the index recover to a close of 25,122 points on Friday (only 80 points lower than the previous week), reducing the year-to-date losses to 2,690 points, or 9.7%. However, fears of a US recession continue to haunt the markets and a 1.4% slump on Wall Street on Friday shows it is far too early to become complacent. The market sees a 78% chance (as indicated by interest rate futures prices) that the Fed will ease rates again at its regular monetary policy meeting on Wednesday to stem the risks to the economy. The outcome has become less certain, though, after it emerged the Fed may have been misled into cutting rates last week by the downward pressure put on equity markets as Societe Generale on Monday tried to unwind positions taken by the rogue trader who single-handedly lost the bank Ç4.9 billion ($7.2 billion).

If the Hang Seng Index holds around current levels for the next four days, this will be the worst January for the Hong Kong stockmarket since 1998, when the index slumped 13.7%. In 2000 it fell 8.4% and in 2002 5.9%, but since then, the first month of the year has either recorded gains or smaller losses.

Maoye was by far the largest of the pulled deals this week. The department store operator, which had tried to raise between $697 million and $905 million, was also the most popular because of its focus on domestic consumption. Even so, Goldman Sachs, which was the sole bookrunner, failed to pull the deal together and the company issued a statement on Friday saying it had decided not to proceed with its global offering according to the original timetable in light of ôthe current turmoil in the international capital markets and the adverse conditionsö in the secondary market.

It is unclear whether the order book was sufficiently covered at the bottom of the price range, although market talk has suggested that the deal could have been completed at that level had the issuer agreed to the low-end pricing. Several issuers have also expressed concerns that they would have to face a very difficult aftermarket when they start trading and thus decided that they may be better off returning when the markets have stabilised.

The key problem for Maoye, though, was the sharp drop in the share price of its bigger rival Parkson Retail Group during the roadshow, which made MaoyeÆs valuation range of 29 to 37.7 times its 2008 earnings look relatively less attractive. As of Tuesday last week, the sector leaderÆs valuation had dropped to 34.1 times from about 45 times at the start of the roadshow and the recovery to about 38 times at the end of last week supposedly didnÆt leave a wide enough gap for investors to feel comfortable.

ôThe challenge for Maoye was that it ended up trying to sell something that is not a Parkson at a valuation close to ParksonÆs,ö one observer says, referring to the fact that Maoye is much smaller in terms of number of stores and is not yet a national player.

Solargiga followed suit over the weekend, delaying its offering which was aiming to raise between $221 million and $265 million at a 2008 P/E valuation of 15.4 to 18.4 times. BNP was the sole bookrunner. According to a source, the owners didnÆt want to price at the bottom after the rebound in the secondary market, while investors would not be talked into a more expensive deal. The company, which makes ingots and wafers for solar cells, is owned in equal parts by its founder Mr Tan and by Taiwan-listed Wafer Works after a merger with one of its subsidiaries in the middle of last year.

Samko faced a similar problem to Maoye in terms of having to deal with a sharp decline in some of its closest comparables. This also included a 14.4% decline in its 52%-owned timber producing subsidiary Sumalindo. Malaysian timber company Samling Global, which is listed in Hong Kong, fell 25% during the seven-day roadshow. On top of that it was a small-cap stock, which is something investors tend to avoid at times of high volatility given the greater exit risks. The company was trying to raise between $87.5 million and $112.5 million through sole bookrunner Credit Suisse.

Meanwhile, a source close to the company said SFK Construction was still hesitating whether to list or not. The Hong Kong-based building construction and civil engineering contractor is seeking to raise between $115 million and $155 million at 8.5 to 11.5 times its projected earnings for the fiscal year to March 2009. ICEA is the sole bookrunner.
Some investors who cancelled their orders early in the week were said to have come back in when the market started to recover and according to the source, the deal is fully subscribed. However, the company is worried about the aftermarket.

ôObviously both the bookrunner and the management want to continue the listing process, but a decision has not been made yet,ö a source remarked over the weekend. ôThere are a lot of risks in the aftermarket. The management is striking a balance between risks and returns. While they want to sell the shares at an acceptable price, they are also concerned about the risks involved.ö
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